Jinesh Gopani is Head of Equity at Axis Mutual Fund. At the Morningstar Investment Conference he was a panelist on a panel moderated by Madhusudan Kela, the chief investment strategist and Reliance Capital. Below is an excerpt from this panel.
The market right now is in an absolute dichotomy. Valuations are so high. Liquidity doesn't seem to be stopping. A few years ago, we would never have imagined that 75% of the bonds in the developed markets could be in negative territory. As a fund manager, how do you reconcile with all this?
The market seems to be in a flux.
While the undertone remains pretty bullish, the broader market or the large caps are not moving anywhere. So, it's a flow which is taking care of the markets going up. However, earnings are not coming in.
So we have to do justice in terms of research concerning the kind of companies we are buying. So, being bottom-up guys, we are concentrating on the companies where we like the promoters, the business models, and the scalability of that business model.
Valuations are out of whack. They take a backseat in this kind of a world. So, we are in a pretty complex world making it difficult for a fund manager to give you a view in terms of what will happen in 2-3 months. But if you take a cycle of 3-5 years, fundamentals would justify the business model.
End of the day, if earnings do not come in, the company will not deliver in terms of the performance.
So, leaving aside the broader market and where it will head depending on the flows, we must concentrate more on the companies and the sectors we want exposure to.
You've had a stellar performance in your ELSS – Axis Long Term Equity. How do you think about alpha generation? Do you think that you need to choose companies from particular sectors? Do you look for differentiated characteristics in particular companies which you are choosing?
We look for companies which can grow higher than the average of that sector or average of that sub-sector.
From that we identify few good promoters, I would say, who have done well in last 5, 10 or 15 years, depending on the history.
Then we do thorough channel checks on the promoters' pedigree, how they have performed in terms of governance, ESG or auditor remarks and all of that.
If that company is a leader in a space or can become a probable leader in that space and has some innovative advantage in terms of the pricing power of the product, then I think the scalability can be pretty big.
So, a few of the mid-cap companies have become stellar large caps or larger midcaps.
We picked up a 2-wheeler company when the market cap was around $300-400 million. We started with a small positioning – 0.5%.
But when we met the management, did our ground level checks, saw the pricing power of the product, the resale value of the product, we kept adding every quarter.
So, ideally it should take 6 to 12 months if you really want to bet big on the company.
Do you still hold the company?
Yes. It's in my portfolio for the last 4½ to 5 years now. The allocation is around 3%.
Our exposure was 0.5% when it was Rs 500 crores. Now it is 3% on Rs 10,000 crores.
Have you sold any of that stock?
We would have trimmed some because obviously the price rise has been just too high and also the valuations are a bit higher than the overall average.
Can you just talk about one company in your portfolio wherein you have an extremely high level of conviction? What is the process you have gone through in terms of identifying that company?
There is a private sector bank which is one of our largest holdings. We are one of the largest investors in the mutual fund space.
The management understands risk very well; is conservative; has a strong balance sheet; has capital; has been able to manage the asset quality cycle pretty well; is in the retail business and commercial segment, not on the corporate side of the book but more on the working capital SME side of the book.
You have 70% of public-sector banks which are under stress, so you have enough room for many private banks to grow.
Can this bank grow? Yes, it can.
Can it grow for 5 years? Yes.
Can it still multiply from here?
Yes, yes - 30% growth.
What is your advice to distributions and investors investing into a mutual fund scheme? How must they choose it? When must they exit a particular scheme?
Paramount is the fund manager who is managing it and the team which has been in existence for years. There are veterans who have delivered 20% growth for 15 or 20 years. So, if you take the compounding effect– 20% growth CAGR, it is phenomenal. That too tax free.
So see the tenure of the fund manager and his experience.
Then comes the thought process. A fund manager should have some thought process going into the fund. He cannot be here and there. He should not gyrate or be directed by the market. If he has a thought process and you are akin to that kind of thought process, then you should be investing in those funds.
